SNL is a simple business with a clean balance sheet. The company directors currently own a significant portion of SNL’s stock.

A large part of SNL’s revenue is non discretionary – trucks and buses need to be kept on the road. Clients are also willing to pay a premium to avoid delays in obtaining parts and for reliability.

The business has enjoyed consistent revenue growth over several years as it has expanded its network of stores across Australian and NZ.

In recent years, SNL has earned an increasing return on invested capital (ROIC). Profitability, coupled with increasing operating margins, indicate that SNL enjoys a sustainable competitive advantage over its smaller peers.

Expansion is continuing as SNL moves into a new main warehouse in Sydney, with double the capacity of the previous location. History suggests that EBIT is flat for 2-3 years during expansion, followed by an increase in profitability thereafter.

The stock pays a trailing dividend yield of 4.62% fully franked.

SNL is currently trading at fair value. My base case assumptions are:

Sales growth = 10% which is in line with history and lower than current revenue growth. I have assumed that sales growth fades to the long-term bond rate in year 10.

Long-term EBIT margin = 10% which is in line with history. This is a conservative assumption since current operating margins are over 12% and margins may continue to improve as SNL generates economies of scale.

Re-investment in working capital = I have made the conservative assumption that assumed that future growth will require 33% more investment in inventory than SNL’s current investment in inventory as a percentage of sales.

Cost of capital (COC) in year 10 = 9%. This is a conservative estimate as the long-term cost of capital should hopefully be lower if SNL continues to grow and develops into a larger and more mature company.

In the long-term SNL’s return on invested capital (ROIC) = COC. This is a conservative assumption since SNL’s historical growth in profitability suggests that it has competitive advantages.